 "commercial paper")
Yields on commercial papers hardened by 10-30 basis points (bps) across tenures in January as the liquidity deficit in the banking system widened, said market participants. The rate impact was sharper for non-banking finance companies.
Commercial papers issued by non-banking finance companies witnessed an uptick of 20 bps for 6-month, and 12-month periods, while the yield on 3-month, and 1-month papers experienced a more significant rise of 30 bps. Three month commercial papers are the most traded papers in the market.
Commercial papers are an unsecured form of short-term debt issued by corporations, which serves as a financial tool primarily directed at addressing immediate financial obligations.
“The three month paper has April maturity. The term premium is always higher as compared to March maturity. So, most of the investors are withholding the purchase of assets which are maturing in the new financial year. Whereas, most of the borrowers are looking to raise liability that mature in the new financial year. This is a cyclical seasonal phenomenon that we witnessed in January onwards. And I think this term premium will actually widen even further as the banking system liquidity will tighten and the buyers will hold on to their cash until mid-February,” said Dhawal Dalal, President & CIO - Fixed Income at Edelweiss Asset Management Limited.
The banking system's liquidity primarily stayed in deficit during the third quarter of the current financial year, and it widened further in January, driven by tax outflows.
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The deficit liquidity in the banking system widened to Rs 2.72 trillion on Monday, according to the data by the central bank.
“The structural liquidity in the system has tightened resulting in the CP market rates shooting up especially at the lower end,” said C V Ganesh, Chief Financial Officer at Fedbank Financial Services Ltd.
Market participants expect the rates to rise further. “The CP rates have been rising because of tight liquidity conditions and they should rise further in the near term,” Vinay Pai, Head of fixed income at Equirus Capital said.
The central Bank has been conducting Variable rate repo auction in order to infuse liquidity in the banking system. In the 2-day VRR auction conducted by the RBI on Tuesday, bids were received for Rs 1.97 trillion, against a notified amount of Rs. Rs. 1.25 trillion.
